These civil appeals are filed by the
Department under Section 130E of Customs Act, 1962 against order passed
by CEGAT dated 22.12.2000 in Final Order No.411-421/2000-D in Appeal
Nos.C/286/98-D and C/302-311 of 2000-D with E/Co/239, 257-260/2000-D
whereby the Tribunal allowed the appeals of the importers herein
(respondents).

2. The question of law that arises
for determination in these civil appeals is:
Whether shoe uppers, outer soles, insoles and sock liners imported by
M/s. Phoenix Industries Ltd. (PIND) in the same container could be
clubbed so that it could be considered as import of the shoe itself in
semi knocked down (SKD) condition? Whether the importer was guilty of
mis-declaration when the importer declared SKD goods as components?

FACTS
3. A synthetic shoe, inter alia, consists of vital parts, namely,
synthetic uppers, outer soles, insoles and sock liners M/s. Phoenix
International Ltd. (M/s. PIL) were the holders of Quantity Based Advance
Licence under which it was entitled to import synthetic shoe uppers, PVC
compounds and natural rubber. M/s. PIL imported synthetic shoe uppers
numbering 5215 pairs on 16.2.96 declaring CIF value at Rs.19,52,401. On
the same day Phoenix Industries Ltd. (M/s. PIND) imported soles and
insoles numbering 5151 pairs worth Rs.7,07,806 (CIF). M/s. PIL had
imported synthetic uppers under DEEC Scheme whereas soles were imported
by M/s. PIND under para 22 of the EXIM Policy 1992-97. Both the
companies imported respective items as components/parts. On preliminary
enquiry, Department was satisfied that there was an attempt to mislead
by importing the above items separately through two different companies
as uppers and soles constituted complete synthetic shoes in SKD form. In
the preliminary enquiry the Department found that all the cartons were
placed in one container with the marking of "Phoenix" without specifying
whether the container was meant for M/s. PIL or M/s. PIND. Hence, two
show cause notices came to be issued dated 7.5.96 for the period 21.6.95
to 4.11.95 and the second show cause notice dated 1.7.96 for the month
of February 1996.

4. In the show cause notices it was
alleged that the parts imported in the name of two companies were
synthetic shoes of "Reebok" brand in SKD form; that the import orders
for synthetic uppers, outer soles and insoles had been placed by the two
companies on the same Supplier in Bangkok; that the import orders
carried the same number; that, both the import orders were signed by Mr.
Bhupinder Nagpal, General Manager of M/s. PIL; that the import invoices
filed by the two companies referred to the same invoice (proforma) dated
2.11.95; and that the import orders for synthetic shoe uppers, outer
soles and insoles were placed by Mr. Bhupinder Nagpal on behalf of the
said two companies.

According to the show cause notices
consumer items were placed in the negative list vide para 156(A) of the
EXIM Policy 1992-97 and under the said para of consumer goods in SKD
condition or Ready to assemble condition, were required to be imported
under specific import licence; that synthetic shoes constituted a
consumer item and, therefore, required specific import licence; that, in
the present case goods in SKD condition or Ready to Assemble condition
were imported without specific import licence despite knowledge on the
part of M/s. PIL that all the components of "Reebok" shoes like
synthetic shoe uppers, outer soles, insoles and sock liners were meant
to be assembled either by them or in their behalf and later supplied to
M/s. Reebok International Ltd. or M/s. Reebok India. In this connection,
the Department placed reliance on the manufacturing agreement between
M/s. PIL and M/s. Reebok International Ltd. In the show cause notices it
was further alleged that M/s. PIL were the owners of M/s. PIND.

In the circumstances, the show cause
notices stated that M/s. PIL had resorted to the above subterfuge of
importing uppers of "Reebok" shoes in their own name and the remaining
three components in the name of M/s. PIND in order to bypass restriction
imposed by para 156(A) of the EXIM Policy 1992-97. In that connection,
the Department alleged that a loan of Rs.11.7 crores was advanced by
M/s. PIL to M/s. PIND, interest free, during the year ending 31.3.95 and
a loan of Rs.7.7 crores was also advanced to the same company, interest
free, during the financial year 31.3.94. For that purpose reliance was
placed on the balance-sheets of M/s. PIL. Under the above circumstances,
the Department alleged, vide the show cause notices, that M/s. PIL was
the importer of all the components, namely, synthetic shoe uppers, outer
soles, insoles and sock liners; that, as per rule 2(a) of the General
Rules of Interpretation of the First Schedule to the Customs Tariff Act,
1975 (for short, "General Rules of interpretation") the goods imported
were not parts/components but were SKD goods, liable to be assessed as
complete finished goods under tariff Heading 6404.19 of the First
Schedule of the Customs Act, 1975 and liable to basic customs duty at
50% ad valorem and countervailing duty at 15% ad valorem. Vide two show
cause notices violation of para 156(A) of the EXIM Policy 1992-97, was
also alleged. In that connection, the Department alleged that M/s. PIL
was fully aware that import of the above parts of "Reebok" synthetic
shoes in the name of one company may give rise to suspicion and,
therefore, the imports were made through the aforestated subterfuge.

Further, according to the show cause
notices, the value given in their import invoices did not represent the
correct transaction value since a single consignment meant for one
importer, namely, M/s. PIL was deliberately split up into two parts and,
accordingly, valuation had to be done by invoking rule 8 of the Customs
Valuation (Determination of Price of Imported Goods) Rules, 1988 (for
short, "Customs Valuation Rules"). In this connection, the case of the
Department was that there were no imports of "Reebok" components in
India by any other company and, therefore, value of comparable goods was
not available and, therefore, the Department had no option but to invoke
rule 8 of the Customs Valuation Rules. Accordingly, the CIF value was
claimed at Rs.1,566.39 per pair under rule 8 of the Customs Valuation
Rules. In the circumstances, vide the show cause notices the importer
was called upon to answer why the benefit of Notification No.45/94-Cus
dated 1.3.94 should not be disallowed; why consignments of the two
companies should not be clubbed for purposes of assessment under EXIM
Policy 1992-97 and Customs Act, 1962; why CIF value of shoes should not
be taken at Rs.1566.39 per pair; why synthetic shoe uppers, outer soles,
insoles and sock liners be not valued at Rs.82,25,114(CIF); why the said
items should not be confiscated under Section 111(d)(l)(m) of the
Customs Act, 1962; why the aforestated four items should not be assessed
to duty under tariff Heading 6404.19 of Schedule I to Customs Tariff
Act, 1975 as synthetic shoes in SKD form liable to basic customs duty at
50% plus CVD at 15% ad valorem; why benefit under DEEC should not be
denied and lastly why penalty under Section 112(A) of Customs Act, 1962
should not be imposed for contravention.

5. In reply to the show cause
notices, it was stated, that the aforestated two companies were separate
independent companies; that M/s. PIND was incorporated as private
limited company in 1992 in the name of M/s. Welcome Leather Industries
Pvt. Ltd.; that M/s. PIL was incorporated as a private limited company
in 1987; that M/s. PIL could not begin its commercial activities for
four years and it started its business in 1991 as merchant exporter;
that in 1991 M/s. Welcome Leather Industries Pvt. Ltd. decided to sell
the company which was acquired by M/s. PIL; that in 1992 M/s. PIL
started manufacturing shoe uppers and, therefore, though both the
companies, namely, M/s. PIL and M/s. PIND were under the same management
having common majority of directors and shareholders, they were separate
independent companies in all respects. According to the reply, the two
companies were separately assessed under Income Tax Act, Sales Tax Act
and Central Excise Duty.

The factories of the two companies
were located at different places. About 500 employees were working in
respective companies. According to the reply filed before the
Commissioner, M/s. PIND was engaged in the manufacture of leather shoes,
synthetic shoes, semi-leather shoes, outer soles etc. M/s. PIND were
registered as a leather industry. According to the reply, goods
manufactured by M/s. PIND including footwear were sold in the domestic
market. According to the reply, in certain cases footwear was got
manufactured by M/s. PIL on job work basis. According to the reply, in
some cases M/s. PIND acted as job workers for M/s. PIL. At the same
time, in other cases, M/s. PIL were as job workers for M/s. PIND.
According to the reply, M/s. PIL handled, during the above period,
overseas sales whereas domestic sales were done by M/s. PIND under the
authorization of M/s. PIL. As regards the import in question, it was
stated that 5251 pairs of outer soles, insoles and sock liners were
imported by M/s. PIND from the foreign Supplier in Bangkok.

The importer denied that M/s. PIND
was a dummy unit of M/s. PIL as alleged by the Department. In reply,
M/s. PIND objected to the clubbing of imports as is claimed in the show
cause notices. In reply, it was stated that M/s. PIND was 100% fully
owned subsidiary of M/s. PIL and, therefore, it was not a dummy company
as alleged by the Department.

In the alternative, it was submitted
that even for the sake of argument imports of two companies were
clubbed, yet there was no violation of Foreign Trade (Development and
Regulation) Act, 1992. In reply, M/s. PIND stated that the concept of "SKD"
did not exist in respect of synthetic shoes; that, in respect of shoes
it was not possible to unassemble the product into parts and, therefore,
para 156(A) of the EXIM Policy 1992-97 had no application to the facts
of the present case. In this connection, it was further stated that in
making of shoes a complicated industrial process involving costly
machine, workers, technical knowhow etc. was involved and that the
finished goods cannot be manufactured without further processing and,
therefore, it is a misnomer to call synthetic shoe uppers, soles,
insoles and sock liners as SKD packs of complete shoes. Reliance was
placed also in para 7(12) read with 156(A) of the EXIM Policy 1992-97 in
respect of the contention that "consumer goods" has been defined in para
7(12) refers to goods like ceiling fans, cycles etc.; that para 7(12)
refers to "consumer goods" which can directly satisfy human needs
without further processing and since synthetic shoes were not capable of
being assembled without further processing they did not attract para
156(A) of the EXIM Policy 1992-97. On the question of applicability of
rule 2(a) of the General Rules of interpretation, the importer stated
that the said rule was meant only for classification of goods under the
Schedule to the Customs Tariff Act, 1975; that, the said rule cannot be
used for interpretation of EXIM Policy 1992-97 or the exemption
notification No.45/94-Cus dated 1.3.1994 and, therefore, the importer
disputed the contention of the Department that because of rule 2(a) of
the General Rules of the Interpretation the items imported should be
construed as SKD packs of sports shoes, therefore, according to the
importer rule 2(a) was not applicable.

Further, according to the importer,
Notification No.45/94-Cus dated 1.3.1994 gave exemption to the items
mentioned in Table A annexed thereto which referred to sole, insole and
sock liner and consequently M/s. PIND was entitled to the benefit of the
said notification. In this connection, it was stated that goods falling
under Table A were not governed by Actual User condition. According to
the importer the said notification was applicable to the aforestated
four items which were used in the leather industry. According to the
importer, so long as the aforestated items, namely, outer soles, insoles
and sock liners were imported as "parts" by M/s. PIND, exemption under
the above notification was applicable.

On the question of valuation it was
stated that the foreign Supplier in Bangkok was unrelated to M/s. PIL
and M/s. PIND; that Reebok International Ltd. had no shares in the
foreign Supplier company; that the said foreign Supplier was not the
sole Supplier of Reebok International Ltd. and, therefore, the
transaction value of the aforestated four parts should be accepted in
terms of rule 4 of the Customs Valuation Rules. Therefore, it was not
open to the Department to invoke rule 8 of the Customs Valuation Rules.
Accordingly, it was prayed by the importer that the show cause notices
be dropped. The reply of M/s. PIL and the reply of M/s. PIND are almost
identical.

6. By order dated 12.4.99, the Commissioner held that the imports made
by M/s. PIND of soles, insoles and sock liners should be treated as
imports by M/s. PIL, however, in view of the elaborate manufacturing
process undertaken in the factory to produce a complete footwear it was
not possible to hold that complete footwear in SKD condition or Ready to
Assemble condition was imported so as to contravene para 156(A) of the
EXIM Policy 1992-97; at the same time, the Commissioner held that since
the four items had to be clubbed and since the entire operations were
undertaken by M/s. PIL and since the four items were essential
components of synthetic shoes, rule 2(a) of General Rules of
Interpretation stood attract. The Commissioner took the view, in this
connection, that rule 2(a) provides for a legal fiction to be applied to
the imported goods. It provides for the rate of duty applicable to
components to be applied as if the components were finished articles.

That, since the imports were of
items which were essential parts of synthetic shoes the said imports
were imports of synthetic shoes in an unassembled form. Hence, it was
held that all imports attracted duty in the present case at the rate
applicable to the footwear and not at the rate applicable to
components/parts. Accordingly, the Commissioner held that no duty was
demandable in respect of synthetic uppers, imported by M/s. PIL during
the period 21.6.1995 to 4.11.1995. However, for imports of soles,
insoles and sock liners made by M/s. PIND, exemption under notification
45/94-Cus dated 1.3.94 was not admissible and consequently all the three
components imported by M/s. PIND would attract duty at the rate
applicable to fully-finished footwear under tariff Heading 64.04. That,
there was no exemption for footwear under the said notification as it
was available only to parts of footwear. That, since all the components
imported by M/s. PIND attracted duty at the rate applicable to
fully-finished footwear, the said exemption notification 45/94-Cus dated
1.3.94 was not applicable to the facts of this case.

7. In conclusion, the Commissioner passed the following order:
"The goods valued at Rs.78,79,968/- in respect of show cause notice
dated 1.7.96 representing the imports made in the name of M/s. Phoenix
Industries Ltd. attracted confiscation. However, since the goods are not
available, no order confiscating the goods can be passed. I confirm the
differential duty of Rs.16,78,891/- in respect of imports made by M/s.
Phoenix International Ltd. and Phoenix Industries Ltd. under two bills
of entry covered under show cause notice dated 7.5.96 under Section
28(1) of the Customs Act, 1962. The duty is payable by M/s. Phoenix
International Ltd., Noida. I also confirm the differential duty of
Rs.29,14,933/- under the proviso to Section 28(1) of the Customs Act,
1962 in respect of imports made in the name of M/s. Phoenix Industries
Ltd. during the period 21.6.95 to 4.11.95 covered under show cause
notice dated 1.7.96. This amount is also payable by M/s. Phoenix
International Ltd. Thus, the total amount of duty payable by M/s.
Phoenix International Ltd. is Rs.45,93,824/-. I also impose upon M/s.Phoenix
International Ltd. a penalty of Rs.10,00,000/- (Rupees Ten Lacs only)
under Section 112(a) of the Customs Act, 1962. Any bank guarantee or
deposit made by M/s.Phoenix International at the time of provisional
release of goods or during the pendency of these proceedings will be
adjusted towards payment of duty demanded and penalty imposed."

CONTENTIONS
8. Mr. Vikas Singh, learned Addl. Solicitor General, submitted that
after clubbing all the four components the Commissioner had erred in
holding that the clubbed items did not constitute synthetic shoes in SKD
condition. That, at the relevant time Para 156(A) warranted all consumer
goods in SKD condition to be imported under specific import licence and
therefore, the word "SKD" had to be construed in the manner in which the
trade dealing in such matter would interpret. That the Commissioner
should have held that the imports were in SKD condition and since
imports of SKD shoes was a restricted item, the advance licences under
which M/s. PIL had made the imports were not applicable to the goods in
question. Learned counsel submitted that the Commissioner had erred in
holding that the process of manufacturing support shoes was quite
elaborate and, therefore, the four items imported did not constitute
synthetic shoes in SKD form. Learned counsel submitted that the
Commissioner had erred in holding that there was no violation of Para
156(A) of the EXIM Policy. In this connection, learned counsel urged
that importation of sports shoes in SKD condition could only be made
against special import licence and in order to circumvent the
restriction in the EXIM Policy 1992-97 the above device was evolved to
bifurcate and import the items separately in the names of two different
importers, i.e., shoe uppers were imported by M/s. PIL against advance
licence whereas soles, insoles and sock liners were imported by M/s.
PIND on payment of concessional rate of duty under para 22 of the EXIM
Policy 1992-97 read with Notification No.45/94-Cus dated 1.3.94. Learned
counsel further urged that on clubbing tariff Heading 64.06 invoked by
the importer, was not applicable and, therefore the importer was liable
to pay basic customs duty at 50% + CVD at 15% ad valorem under tariff
Heading 64.04. That, the said device of bifurcation was to get the
benefit of concessional rate of duty under Notification No.45/94-Cus
dated 1.3.94. That, the entire funding and manufacturing functions were
undertaken only by M/s. PIL which had entered into Buy-Back Arrangement
with Reebok International Ltd. and, therefore, there was a close
relationship between Reebok International Ltd., M/s. PIL and M/s. PIND
which attracted rule 8 of the Customs Valuation Rules. For the
aforestated reasons it was urged that the impugned decision of the
Tribunal deserves to be set aside.

9. Mr. V. Lakshmikumaran, learned counsel appearing on behalf of the
respondents, submitted that the Commissioner had erred in treating M/s.
PIND as a dummy of M/s. PIL. In this connection, it was urged that the
two companies are separate independent entities. They were incorporated
on different dates. They are in different business. The domestic market
was handled by M/s. PIND whereas export market was looked after by M/s.
PIL. M/s. PIL was the holding company whereas M/s. PIND was a subsidiary
company. Both the companies had separate balance-sheets.

They were registered separately
under Central Excise Act. M/s. PIL had fulfilled its export obligations
and in recognition thereof an advance licence was issued in its favour
inter alia to import shoe uppers and that even in the DEEC the name of
M/s. PIND was also shown as Supporting Manufacturer. It was further
contended that para 156(A) of EXIM Policy 1992-97 was not applicable to
synthetic shoes. It was applicable to products like bicycles, ceiling
fans etc. In this connection, learned counsel urged that it is
over-simplification to say that if these four parts are clipped together
it would constitute a sports shoe. Learned counsel invited our attention
to the order of the Commissioner which indicates complicated procedure
involved in the manufacture of a sports shoe.

Therefore, it is urged on behalf of
the respondents that in the present case there was no import of footwear
in the SKD condition and, therefore, para 156(A) of the EXIM Policy
1992-97 was not applicable. Learned counsel urged that even according to
the Commissioner there was no import of sports shoe in SKD condition
and, therefore, there was no violation of para 156(A) of the EXIM Policy
1992-97. Learned counsel urged that this finding of the Commissioner has
been confirmed by the Tribunal, therefore, this Court should not
interfere with the concurring finding. Learned counsel next urged that
M/s. PIND was an independent Unit. It had imported outer soles, insoles
and sock liners under para 22 of the EXIM Policy 1992-97. It had paid
duty at the concessional rate. Learned counsel submitted that in the
present case we are concerned with tariff Heading 64.04 (footwear) as
against tariff Heading 64.06 (parts of footwear). Learned counsel
submitted that apart from the four parts, namely, shoe uppers, outer
soles, insoles and sock liners, there are 28 other parts domestically
procured and consumed/used in the manufacture of a sports shoe.

He submitted that the process
of manufacture was an intricate process. It was urged that if an error
was to creep in the manufacture of the sports shoe the manufacturer
would be liable for damages to be paid to the sportsman to whom injury
may take place on account of defect in the manufacture of the footwear.
Accordingly, it was urged that the four parts, referred to above, did
not constitute a sports shoe (footwear) and the Commissioner had erred
in denying the benefit of concessional rate of duty on the ground that
what was imported was in essence a complete footwear falling under
tariff Heading 64.04. In this connection, learned counsel also submitted
that rule 2(a) of the General Rules of Interpretation was not applicable
in this case, particularly, when "parts" of footwear came specifically
under tariff Heading 64.06. In this connection, reliance was placed on
rule 1 of the General Rules of Interpretation which stated that the
classification shall be determined according to the words used in the
headings. Learned counsel urged that rule 2(a) of the General Rules of
Interpretation in any event cannot be used to interpret Notification
No.45/94-Cus dated 1.3.94. It was further contended that under
Notification No.45/94-Cus dated 1.3.94 insoles and outer soles fell
under Table 'A' annexed to the said notification.

That, items falling under Table 'A'
when imported into India for use in the leather industry were entitled
to the benefit of concessional rate of duty and, therefore, the
Commissioner had erred in holding that insoles and outer soles were not
entitled to the benefit of concessional rate of duty as they were used
in the manufacture of synthetic shoes which did not come under Leather
Industry. Learned counsel submitted that M/s. PIND had imported soles,
insoles and sock liners under para 22 of the EXIM Policy 1992-97 and,
therefore, it was entitled to the benefit of the Notification
No.45/94-Cus dated 1.3.94. Lastly, it was urged that in the present case
the Commissioner had erred in invoking rule 8 of the Customs Valuation
Rules. In this connection, it was urged that in this case the importer
had imported the aforestated items for the sale price. That the import
was made by two independent companies. That the transaction was at arm's
length; that there was no additional consideration and, therefore, rule
4 of the Customs Valuation Rules was alone applicable and there was no
basis whatsoever for the Department to invoke rule 8 of the Customs
Valuation Rules.

Accordingly, learned counsel
submitted that the Tribunal was right in holding that the aforestated
items were imported separately by two independent companies and that
there was no evidence to show that the footwear in SKD condition was
imported and, therefore, in the present case importer was entitled to
the benefit of Notification No.45/94-Cus dated 1.3.94 read with tariff
Heading 64.06 (parts of footwear) and, therefore, the said items were
not liable to duty at the rate of 50% and 15% basic and CVD, ad valorem.

FINDINGS
10. We find merit in the present civil appeals filed by the Department.
For the sake of convenience we reproduce para 22 and 156(A) of the EXIM
Policy 1992-97 which read as follow:

"Chapter V ImportsFree
Importability22. Capital goods, raw materials, intermediates,
components, consumables, spares, parts, accessories, instruments and
other goods may be imported without any restriction except to the extent
such imports are regulated by the Negative List of Imports or any other
provision of this Policy or any other law for the time being in force."

"PART II
156. RESTRICTED ITEMS
A. CONSUMER GOODS
Sl.No. Description of ItemsNature of restrictionAll consumer goods,
howsoever described, of industrial, agricultural mineral or animal
origin, whether in SKD/CKD condition or ready to assemble sets or in
finished formNot permitted to be imported except against a licence or in
accordance with a Public Notice Issued in this behalf.

11. In the case of excise duty, the
taxable event is "manufacture". In the present case, however, we are
concerned with the levy of customs duty. That duty is levied on the
"act" of importation. Therefore, intention plays an important role in
matters in which there is an allegation of duty evasion. In the present
case, the Department has alleged that a device was evolved by the
importer showing import of shoe uppers by M/s. PIL whereas outer soles,
insoles and sock liners imported by M/s. PIND. A subterfuge was,
therefore, created to show that two independent companies had imported
separate parts of the footwear in order to bypass para 156(A) of the
EXIM Policy 1992-97. Under the said paragraph, importation of synthetic
shoes in SKD condition could only be made against specific import
licence. M/s. PIL was aware of the restrictions. It was the only real
importer of all the four items. M/s. PIL had funded M/s. PIND with
interest free loans running into Rs.18 crores (approximately). M/s. PIND
was the factory of M/s. PIL (See the DEEC certificate). When there is an
allegation of subterfuge, the court has to examine the circumstances
surrounding the import to ascertain whether the importer had entered
into fictitious arrangement to evade customs duty.

The intention behind the act of
importation has to be probed. In this case, the most clinching
circumstance is that there is manufacture of the finished products,
namely, "synthetic shoe" for domestic and export markets. M/s. PIL
manufactured export quality synthetic shoes on their own account whereas
those sold in the domestic market by M/s. PIND was also manufactured by
M/s PIL for M/s PIND. Further, in his statement, B. Nagpal, on behalf of
the importer, has categorically stated that synthetic uppers (imported
by M/s PIL), soles, insoles and sock liners (imported by M/s PIND) did
constitute complete shoe in SKD condition. Therefore, when we come to
the question of "intention" in the present case it becomes clear that
the entire device of bifurcation was arranged in order to bypass the
restriction imposed vide para 156(A) of the EXIM Policy.

The reply of B. Nagpal indicates
that, according to the importer, the said four components did constitute
synthetic shoe in SKD condition and in order to circumvent 156(A) the
entire device was arranged by the importer to evade duty. Further, we
find that in the reply to the show cause notices there were no details
supplied by the importer regarding the number of units under M/s. PIL.
The statement of Bhupinder Nagpal in the preliminary enquiry shows that
there were three units in Noida under M/s. PIL. One Unit is in B-1C
Sector 10 manufacturing "Phoenix" brand of shoes for exports. There was
one more Unit in A-4, Sector 5 manufacturing "Reebok" brand of shoes for
exports. It also undertook manufacturing of shoes for domestic sales on
job work basis at Sector A-37, Sector 60 for M/s. PIND. The third unit
was M/s. PIL. No details of the turnover have been furnished. No details
of the number of employees have been furnished. The bifurcation of the
turnover between manufacture of synthetic shoes exported and shoes sold
in the domestic market was not given. The functional connectivity of the
three units was not given. No reason have been given as to why M/s. PIL
did not import all the four items particularly when M/s. PIL, as stated
hereinbelow, has been in complete charge of manufacturing.

The obvious reason behind the said
bifurcation was to obtain the benefit of the Notification No.45/94-Cus
dated 1.3.94. However, the clinching circumstance is that M/s. PIL was
not only manufacturing export quality synthetic shoes but it also
manufactured as job-worker of M/s. PIND domestic quality synthetic
shoes. Soles, insoles and sock liners were imported by M/s. PIND and
supplied as raw-material to M/s. PIL who manufactured the synthetic
shoes which were routed through M/s. PIND to M/s. Reebok India for sale
in the domestic market. In the circumstances, the complete manufacturing
activity was in the hands of M/s. PIL.

They manufactured synthetic shoes
sold in the export market and they also manufactured synthetic shoes
which were sold in the domestic market. The shoe uppers constituted an
important part of the footwear. That part was imported under the advance
licence by M/s. PIL. The same company got the outer soles, insoles and
sock liners in the name of M/s. PIND. It is M/s. PIL which ultimately
manufactured synthetic shoes. Therefore, the entire manufacturing
activity was carried out by M/s. PIL. Therefore, it is clear that the
above device of importation of one item by M/s. PIL and three items by
M/s. PIND was a subterfuge/fictitious arrangement intended to deceive
the Department and fraud on para 156(A) of the EXIM Policy 1992-97. The
above circumstances have not at all been considered by the Tribunal.

In cases of the present nature, the
Tribunal should look at the entire composite picture in order to
ascertain the real intention behind the arrangement on which the
importer relies. Lastly, the shoe uppers were imported by M/s. PIL
whereas soles, insoles and sock liners were imported by M/s. PIND and
given to M/s. PIL who along with 28 other items (peripherals), procured
domestically, manufactured the finished product, viz., synthetic shoes.
The entire device was undertaken to show that what was imported were
parts and not the footwear in the SKD condition. Therefore, M/s. PIL was
the only real importer of all the four items and, in the circumstances,
the Department was right in clubbing.

12. It was urged vehemently even if the said four items were clubbed
together it would not result in the manufacture of the synthetic shoes
as an intricate process is required to be adopted before the finished
product stood emerged. As stated above, if the transaction of M/s. PIND
and M/s. PIL are looked at separately then the question of subterfuge
cannot be examined. In the present case, interest-free loans had been
advanced by M/s. PIL to M/s. PIND. The real importer was only M/s. PIL.
The manufacturer was also M/s. PIL. The entire transaction was completed
by M/s. PIL. No reason has been given as to why M/s. PIL could not have
imported the outer soles, insoles and sock liners under para 22 of the
EXIM Policy 1992-97 by payment of duty at the concessional rate under
Notification No.45/94-Cus dated 1.3.94. The obvious intention was to
bypass the EXIM Policy 1992-97 and claim benefit of exemption
Notification No.45/94-Cus dated 1.3.94.

Lastly, as stated above, all four
items plus 28 other items (peripherals), domestically procured, were
used in the manufacturing process undertaken by M/s. PIL either on its
own account (in case of export) or as job-worker (incase of domestic
sales) which led to the emergence of the final product. Therefore, the
importer was liable to be assessed under tariff Heading 64.04 and
consequently not entitled to the benefit of exemption Notification
No.45/94-Cus dated 1.3.94. Lastly, soles and insoles as also sock liners
were imported by M/s. PIL in the name of M/s. PIND; that M/s. PIL had an
agreement with Reebok International Ltd. which had its subsidiary in
India, viz., Reebok India to whom synthetic shoes were sold by M/s. PIL
through M/s. PIND and, therefore, the Department was right in invoking
rule 8 of the Customs Valuation Rules. Unfortunately, none of these
aspects have been considered by the Tribunal.

13. We, therefore, set aside the
impugned judgment of the Tribunal. We hold that the respondents were
guilty of violating para 156(A) of the EXIM Policy 1992-97; that the
respondents were liable to be assessed under tariff Heading 64.04 and,
accordingly, they were liable to pay duty of customs at 50% + CVD at 15%
ad valorem; that the respondents were not entitled to the benefit of
concessional rate of duty under Notification No.45/94-Cus dated 1.3.94
and that the Department was right in invoking rule 8 of the Customs
Valuation Rules. Accordingly, we remit only the question of
re-quantification of differential duty, redemption fine and penalties,
payable by the respondents herein, to the Commissioner of Customs,
Inland Container Depot, Tughalkabad, New Delhi, who will decide the said
issue in accordance with law.